Who: HM Treasury
Where: United Kingdom
When: 20 July 2020
Law stated as at: 6 August 2020
On 20 July, HM Treasury launched a consultation on proposals to broaden the scope of the financial promotions regime to include certain types of cryptoassets that currently fall outside of the regime’s perimeter. The consultation, which is due to close on 25 October 2020, focuses on “unregulated cryptoassets”, which refers to all tokens other than security tokens and e-money tokens. It seeks to strike a balance between consumer protection and fostering innovation.
The consultation arose out of an October 2018 report published by the Cryptoassets Taskforce, which concluded that cryptoassets could pose risks to consumers and markets. As a result, the government has concluded that unregulated cryptoassets pose “unacceptable levels of risk” to consumers, specifically that consumers may purchase inappropriate products without having received sufficient information; may be exposed to fraud; and may suffer detriment due to the failure or immaturity of market infrastructures and services.
The taskforce found that adverts for cryptoassets often targeted retail investors, did not give sufficient information, and highlighted benefits without warning consumers that they could lose their investment and would not benefit from regulatory protection since the assets were unregulated. The consultation quotes consumer research conducted by the Financial Conduct Authority in 2020, which highlighted an increase in the number of people holding cryptoassets, currently estimated at 3.86% of the general population or 1.9 million UK adults. Around 11% of those who own or have owned cryptoassets thought they were protected, while 45% of current or previous owners have seen an advert for cryptocurrency (with 35% of those saying the advert made their cryptoasset purchase more likely). Customers displaying less knowledge of crytoassets were more likely to be influenced by adverts, and those more influenced by adverts were more likely to regret their purchase afterwards.
One of the taskforce’s recommendations was that HM Treasury should consult on whether the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (SI 2001/544) (RAO) should be extended to include cryptoassets, which currently do not fall within its scope but share some of the features of assets that do.
Under the current regime, only authorised firms or firms whose promotions have been approved by an authorised firm may promote a given financial product. Any infringement of this prohibition by an unauthorised firm is a criminal offence. However, this only applies to products regulated under the RAO. As a result, the government is seeking to bring currently unregulated cryptoassets within the list of controlled investments.
Its proposed definition of cryptoassets that fall within its scope includes cryptoassets that are both fungible and transferable, while it excludes non-fungible tokens such as digital collectibles and non-transferable tokens such as those issued within a closed system that can only be redeemed via the entity that issued them. E-money tokens, which are regulated under the Electronic Money Regulations 2011, are also excluded from its scope. The consultation also proposes to add a new exemption under the Financial Services and Markets Act’s Financial Promotions Order. This would allow vendors that merely offer to accept cryptoassets in exchange for their goods or services and buyers that merely offer cryptoassets to pay for goods or services in the same manner as they would use fiat currency to continue doing so without needing to comply with the financial promotions restrictions.
This consultation must be read in conjunction with a parallel consultation launched by HM Treasury, which aims to give the Financial Conduct Authority (FCA) greater powers in relation to financial promotions: under the proposals, authorised firms would have to obtain a specific permission from the FCA before they can approve the financial promotions of unauthorised firms.
Why this matters:
If introduced, the new rules would considerably bolster the safeguards in place to protect consumers against the risk of purchasing cryptoassets without a full understanding of what they are purchasing and any associated risks. Recently, there has been an exponential rise both in the number of consumers investing in cryptoassets – up 74% in one year – and in the breadth and variety of products available. While interest in cryptoassets continues to grow (with Bitcoin rising in value and Mastercard expanding its cryptocurrency programme), increasing regulation in this area could mean that we see both of these trends begin to level off.
The proposals will affect large numbers of service providers who deal with cryptoassets. The government does not propose to introduce any transitional period before the proposed amendments come into force. Cryptoasset firms should therefore use this lead time to adjust their practices prior to the amendments coming into force.